At the beginning of 2016, Norris Company had a deferred tax liability of $6,400, because of the use of MACRS depreciation for income tax purposes and units-of-production depreciation for financial reporting. The income tax rate is 30% for 2015 and 2016, but in 2015 Congress enacted a 37% tax rate for 2017 and future years.
Norris’s accounting records show the following pretax items of financial income for 2016: income from continuing operations, $119,300 (revenues of $351,000 and expenses of $231,700); gain on disposal of Division F, $21,300; loss from operations of discontinued Division F, $8,700; and prior period adjustment, $14,800, due to an error that understated revenue in 2015. All of these items are taxable; however, financial depreciation for 2016 on assets related to continuing operations exceeds tax depreciation by $5,400. Norris had a retained earnings balance of $163,000 on January 1, 2016, and declared and paid cash dividends of $30,300 during 2016.
Required:
1. | Prepare Norris’s income tax journal entry at the end of 2016. |
2. | Prepare Norris’s 2016 income statement. |
3. | Prepare Norris’s 2016 statement of retained earnings. |
4. | Show the related income tax disclosures on Norris’s December 31, 2016, balance sheet. |
Solution:
A) Journal Entry-
Date | Account titles and description |
Debit ($) |
Credit ($) |
Dec 31, 2016 |
Income Tax Expense (Difference) | 35,767 | |
Gain on Disposal of Division F ($21,300*30%) | 6,390 | ||
Retained Earnings (14,800*30%) | 4,440 | ||
Deferred Tax Liability ($4440*37%) | 1,643 | ||
Loss from operations of discontinued Division F ($8,700*30%) |
2,610 | ||
Income Tax Payable* | 45,630 |
*Income Tax Payable
Amount ($) | |
Income from Continuing Operations | 119,300 |
Add: Gain on disposal of division F | 21,300 |
Add: Decrease in Future Taxable amount | 5,400 |
Add: Understand revenue | 14,800 |
Less: Loss from operations of discontinued Division F | (8,700) |
Taxable Income | 152,100 |
Tax Liability @ 30% | 45,630 |
B) Income Statement
Amount ($) |
Amount ($) |
|
Revenues | 351,000 | |
Expenses | (231,700) | |
Pretax Income for Continuing Operations | 119,300 | |
Income Tax Expense | (35,637) | |
Income from Continuing Operations | 83,663 | |
Results from Discontinued Operations: | ||
Less: Loss from Operations of Division F ($8,700-$2,610) |
(6090) | |
Add: Gain on disposal ($21,300-$6390) | 14,910 | 8,820 |
Net Income | 92,483 |
C) Statement of Retained Earnings
Amount ($) | |
Retained Earnings, January 1, 2016 | 163,000 |
Add: Prior period Adjustment (14,800-4,440) | 10,360 |
Adjusted retained earnings, January 1, 2016 | 173,360 |
Add: Net Income | 92,483 |
265,843 | |
Less: Cash Dividends | (30,300) |
Retained Earnings, December 31,2016 | 235,543 |
D) Partial Balance Sheet
Amount ($) |
|
Current Liabilities | |
Income Tax Payable | 45,630 |
Non-Current Liabilities | |
Deferred Income Taxes ($6400 beginning deferred tax liability-$1,643 decrease) | 4,757 |
At the beginning of 2016, Norris Company had a deferred tax liability of $6,400, because of...
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